Trader: "It's Amazing What Just Happened On Tuesday"

Hedge Away Your Fears by Taking on More Risk

Sadly, it has become all too common for traders to get fixated on one specific thing, which may or may not happen. They then find themselves unable to make trading decisions based on the inputs that one would normally expect to drive things. Economic numbers cause momentary blips signifying little or nothing. The situation is magnified on Fridays when we take for granted that anything could happen over the weekend. Who wants to go home short bonds when a tweet can ruin your best laid plans?

But I have to say, it was amazing what just happened on a Tuesday. When the Tesla CEO started his messaging barrage, trading seemed to seize up everywhere.

People could have been forgiven for asking why this particular news caused trading to be suspended for the entire membership of the S&P 500. Bond and foreign exchange traders were similarly transfixed

Without question, it’s a great story. The buzz was palpable. But I wonder how much of it was an intense interest in this particular company and man. Or whether we have just become trained to stop doing what we are supposed to as soon as something new and confusing shows up. Everyone just pushes back from their keyboards, engages the go-slow button on their algorithms and waits.

It’s a phenomenon that has become so common that, even if noticed, goes largely unremarked upon. But it’s very unhealthy. We used to be paid to try to diligently stay focused and, mostly, engaged during the lulls in order to be prepared to spring into action when something happened. Now it’s quite the reverse. When the best opportunities present themselves, no one wants to play. And worse, when they’re most needed, the transactors go MIA.

True this is indicative of the fact that much of the news can’t be factored into models. But also that traders remain much more afraid of losses than motivated by gains. It seems to be true regardless of whether they are institutionalized or not. And we have raised a generation of market participants who are largely fatalistic. I never hear anymore that you must learn to make your own luck.

If, or more likely when, regulators ease restrictions on proprietary risk and position sizes, things will be slow to start, because traders are out of practice and market structure isn’t really set up for it. No matter the protests to the contrary. Of course, as long as central banks remain activist investors, it may not matter all that much.

Many of us assume that in fairly short order, U.S. equity markets will print new all-time highs. The templates to announce it are already written. Champagne corks will pop. The temptation to take a peak at your 401(k) will be overwhelming. The GDP and employment reports were strong. Actually, better than they were given credit for. Earnings have mostly done their part, notable exceptions notwithstanding.

But, make no mistake, the U.S. stock market is a favorite flight-to-safety vehicle. Big, liquid and simple. It is, counter-intuitively and simultaneously, benefiting from good fundamentals and the fact that everyone is scared.

Try this one on for size. If the world were to calm down and more level heads to prevail, you might find it the perfect time to be lightening up. Who would have thought that the analysts calling for a major correction might just be the optimists out there.